The Feds nonrecessionary rate cut renders traditional defensive strategies ineffective

Bijie.com reported:
The traditional strategy for interest rate cuts is to choose defensive stocks and high dividend stocks. However, this time the Federal Reserve (Fed) chose to make a significant rate cut in a relatively loose financial environment, sending a signal to the market to go on the offensive. Investors are shifting from defensive stocks to cyclical stocks and large-cap stocks, investing in industries such as banking, technology, real estate, and automotive.
By Li Xiaoyin
Source: Wall Street News
As the Fed opens its first rate cut in four years, has the trading manual for interest rate cuts in the stock market changed?
Generally speaking, when the Fed cuts interest rates to boost the economy, investors tend to choose defensive stocks and high dividend stocks due to the need for safe-haven investments, avoiding growth stocks including the technology industry that are vulnerable to macroeconomic impacts.
However, this time, due to the resilience of the US economy, the rate cut has led to a surge in technology stocks, record highs in the stock market, continued economic growth, and favorable corporate profit prospects.
Based on the fund flow after the rate cut, investors are shifting from defensive stocks to cyclical stocks.
According to data from Goldman Sachs’ bulk brokerage business, hedge funds bought TMT stocks (technology, media, telecommunications) for the third consecutive week last week, with net positions reaching the highest level in four months. At the same time, defensive stocks experienced the largest net sell-off in over two months, with the outflow of funds from utility stocks reaching the largest scale in over five years.
Frank Monkam, Senior Portfolio Manager at Antimo, said:
“The Fed’s significant rate cut in a relatively loose financial environment is a clear signal to the market to take an offensive position.”
“Traditional defensive stocks, such as utilities or consumer stocks, may not be very attractive.”
Why is this rate cut different from history?
Why is this rate cut considered a “non-recessionary rate cut”?
According to Bank of America’s data, in nine easing cycles since 1970, eight occurred during a slowdown in corporate earnings. However, Savita Subramanian, head of the bank’s stock and quantitative strategy, wrote in a report to clients that the current situation is that earnings are expanding, which benefits cyclical and large-cap stocks.
This means that the Fed is not cutting rates because of an economic recession, Subramanian said:
“The Fed doesn’t have a script – every easing cycle is different.”
However, looking at the historical rate cut cycles, the Fed’s rate cuts have often driven an overall rise in the stock market.
Bank of America data shows that since 1970, the S&P has averaged a 21% increase in the year following the Fed’s first rate cut in the absence of an economic recession.
Investment style switch: Banks, technology, and real estate in demand
So, what investment style does this “non-recessionary rate cut” bring?
As Subramanian mentioned, investors are shifting towards cyclical stocks, large-cap stocks, and other industries that are experiencing growth.
Industries such as real estate and automotive are expected to benefit from the stimulus of loose monetary policies on consumption. Phil Blancato, CEO of Ladenburg Thalmann Asset Management, said:
“You will see excited consumers – the decline in mortgage rates will stimulate consumption, whether it is in the housing market or the automotive market.”
Utility stocks, which are part of traditional trading strategies, remain popular as the AI investment boom increases the attractiveness of this sector. In fact, utility stocks have risen 26% year-to-date, making it the second-best performing sector in the S&P.